Behavioral Science At Your Service |
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Becoming a Decision Leader: The Company Perspective Quick read, actionable insights Decision leaders are companies that treat decisions as strategic assets. That is, they train their people on how to make decisions in a systematic way, using appropriate tools that they customize to their needs and environment. They also learn from past decisions and capture this knowledge for the next generation of employees. They track and measure decision outcomes and, when necessary, they loop back to adjust original decisions. Why is decision leadership important? Empirical studies show that, compared to peers, decision leaders experience: Improvement of close to 5% across financial metrics such as profit, revenue and shareholder return Less time spent on making decisions Less time wasted on unused analysis and analytics Improved employee engagement
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The background: Research in organizations worldwide reveals the following unhelpful, biased behaviors as common in business contexts*: We overestimate the likelihood of positive events and underestimate that of negative ones We place extra value on evidence consistent with our favorite belief and not enough on evidence that contradicts it We strive for consensus at the cost of a realistic appraisals We focus too narrowly on our own perspective ignoring how others would be affected We overestimate our skill relative to others and our ability to have an impact on future outcomes We assume that everyone has access to the same information We value immediate rewards very highly and undervalue long-term gains We pay attention to historical costs that are not recoverable (sunk costs) when considering future options We prefer the status quo in the absence of pressure to change it
*This list is not exhaustive. |
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What to do about it?
To become a decision leader, there is one critical action that companies must first take. Systematize decision-making. Systematizing decisions has many advantages that outweigh the cost. To name a few, Systematization improves the decision-making process by reducing bias and noise. Examples of biased behaviors are those above and include confirmation bias, overconfidence, present bias and groupthink. Noise is the unwarranted variation in decisions from various decision-makers while the information remains the same. For example, insurance claims officers faced with identical claims situation are expected to treat the situation in a similar way. But what happens in fact is that judgments are often influenced by irrelevant factors such as mood, time of day and the weather. Systematization allows employees to learn from past decisions and retains these learnings even when employees move on, thus making the knowledge available to future employees. Management, clients and other stakeholders increasingly demand transparency and accountability in decision-making.
One very powerful way to systematize decision-making is by using checklists. |
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A checklist is a list of steps or items to be followed for completing a certain task, that allows for systematic results. It is a type of job aid used to reduce the chance of failure by compensating for the limits of human cognition, memory and attention. To showcase the effectiveness of checklists, in his book The Checklist Manifesto, surgeon and journalist Atul Gawande describes how he introduced a surgery checklist to eight hospitals. Before performing each surgery, surgeons, nurses, and other personnel systematically went through the checklist to remind themselves of the steps involved in the procedure. This new practice resulted in 36% fewer major complications and 47% fewer deaths. Checklists are part science, part art. If they are too detailed, they may end up being irrelevant and people will invent shortcuts. If they are too vague, they won’t be as helpful. While there is no universal checklist (each business needs to develop a custom-made version), there exist useful prototypes with items specifically developed to steer the decision-making process clear of cognitive traps. For example, including questions such as: If you had to make this decision again in a year, what information would you want, and can you get more of it now? Are the people making the recommendation overly attached to past decisions? Where did the numbers come from? Imagine it’s a year later and the project was a disaster. Why did that happen? (This is the Pre-mortem technique. Click on the picture below to find a short visual guide.)
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In addition to systematizing decision-making, there is a series of behaviorally-informed tools & methods to incorporate, where possible, to help employees make better decisions: Streamlining processes. Audit organizational processes to reveal any unnecessary steps that lower motivation or increase the potential for biased behaviors such as the ones above. Use joint, rather than separate, evaluations. Evaluating decision alternatives simultaneously, rather than sequentially, eliminates the tendency to weigh options against different criteria. Use planning prompts and reminders. People often intent to act in a particular way but forget or fail to follow through. Simple reminders or prompts can help employees stick to the plan. Create opportunities for reflection. Taking time out of our busy days to just think may sound costly, but it is an effective way to encourage conscious thinking and employee development. Increase accountability. Finding ways to hold individuals accountable for their judgments and actions increases the likelihood that they will be vigilant about eliminating bias from their decision making. Build in automatic adjustments. Managers at Microsoft, for example, figured out that programmers vastly underestimate how long it will take them to complete tasks—a common cognitive bias called the planning fallacy. Microsoft’s solution: Add buffer time to projects. Managers examined historical data on project delays and came up with guidelines. Timelines for updates to applications such as Excel and Word, for example, receive a buffer equal to 30% of the schedule. For more complex projects, such as operating systems, timelines get a 50% buffer. Rotate employees to new roles to get a fresh perspective, as auditors at accounting firms, credit officers at banks, and board members serving on committees frequently do. Design the choice architecture (that is, the environment in which employees make decisions) in a way to harness biases & heuristics. For instance, loss aversion: people feel twice as bad about incurring a loss as they feel good about receiving a gain of the same amount. Loss aversion has been successfully used with respect to bonuses. A bonus can be allocated to employees over a certain period and tied to a specific measurable target, out of which an amount is subtracted for falling short on this target.
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Take-aways for decision leadership: Decision leaders (also called decision ninjas) are companies that treat decisions as strategic assets. To become a decision leader, first and foremost, systematize the internal decision-making processes to reduce errors from bias and noise, as well as to safeguard accumulated knowledge from past decisions. Using checklists is a powerful way for systematizing decision-making. To create one for your company, you can draw from research-based checklist prototypes that include items to tackle cognitive traps. Depending on each context, a variety of behaviorally-informed tools & methods exist that you can incorporate to help tackle unhelpful tendencies. Becoming a decision leader (decision ninja) is an uphill journey but the results are worth it.
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